Is an embargo coming?

China’s rare earth dominance has re-emerged as a geopolitical flashpoint following President Xi Jinping’s visit to a rare earth processing facility and a Global Times editorial suggesting rare earth exports could be used as leverage in the US-China trade war. These signals revived fears of an embargo and triggered deeper reflection on how Western economic engagement with China since World Trade Organization (WTO) accession in 2001 has weakened US industrial resilience.

Rare earth elements (REEs) comprise 17 metals essential to electronics, renewable energy technologies, and advanced weaponry. They are not geologically scarce, but extraction and processing are complex and environmentally damaging. China holds only 36% of global REE reserves, yet it has transformed this modest endowment into a weapon of potentially great geo-economic power.

There is a clash between two political-economic systems. In the US, reliance on market forces, strict environmental regulation, and reluctance to deploy industrial policy left supply chains exposed. In China, state planning, environmental laxity, predatory pricing, and strategic acquisitions produced near-monopoly control. The result is stark: China now dominates an industry the United States once led.

Déjà vu

China has used rare earth leverage before. In September 2010, Beijing halted rare earth exports to Japan after a maritime incident involving a Chinese fishing boat. This embargo coincided with sharp reductions in global export quotas, widely interpreted as an attempt to force more downstream processing, such as alloy and magnet manufacturing, into China.

The strategy worked in the short-term but backfired strategically. A WTO case brought by the United States, EU, and Japan ruled against China’s export restrictions. Even more damaging, panic-driven price spikes outside China triggered innovation, substitution, recycling, and new mining projects, undermining China’s long-term leverage.

The episode also exposed the difficulty of targeted embargoes. Once exported, rare earths cannot be controlled, meaning restrictions hurt all importers, not just intended targets. An embargo today risks alienating neighbors and accelerating Western diversification efforts. The ‘geo-economic weapon’ of rare earths has a limited shelf life.

How did China come to monopolize the industry?

China’s rise to dominance is a textbook case of state-driven industrial policy. At its peak, China produced over 90% of global rare earths, and for some heavy rare earth elements, 99%. This dominance was not inevitable.

Through the 1980s, the United States led global production. China’s ascent relied on lower environmental standards, state subsidies, and predatory pricing that drove Western competitors out of business. These tactics were complemented by strategic acquisitions of foreign technology and heavy state investment across the entire value chain.

The outcome is not merely dominance in mining but control over processing, refining, and intermediate products, particularly magnets, where real strategic value lies. Rare earths matter less as ores than as inputs into high-value manufacturing and military systems.

A problem of America’s own creation?

The decline of the US rare earth industry centers on the Mountain Pass mine in California, discovered in 1949 and expanded dramatically in the 1960s to meet demand for europium in color television. With ore concentrations of around 8%, Mountain Pass was among the world’s most economical mines.

Yet, in 2002, the mine closed due to environmental violations and sustained price pressure from Chinese producers. A revival attempt by Molycorp in 2012 collapsed into bankruptcy by 2015, following a global metals price downturn. During this hiatus, China consolidated its grip on global supply.

Although Mountain Pass has since reopened under new ownership, including a minority Chinese stake, US self-sufficiency remains illusory. North American ore is still shipped to China for processing, leaving downstream dependence intact.

Equally consequential was China’s acquisition of Magnequench in 1995, a former General Motors subsidiary and key Pentagon supplier of rare-earth magnets for precision-guided missiles. The technology and production were transferred to China and the last US factory closed in 2006. Together, Mountain Pass and Magnequench illustrate how US policymakers failed to consider the strategic consequences of market passivity.

How disruptive could an embargo be?

Rare earth demand has surged since 2010, driven by electric vehicles and wind turbines, intensifying concerns about supply disruption. Opinions diverge sharply on how damaging an embargo would be.

More dovish assessments highlight substitution, recycling, and new non-Chinese supply. A 2014 Center for Foreign Relations (CFR) study found China struggled to enforce past restrictions, with up to 30% of production smuggled in the late 2000s. Exporters also circumvented controls by shipping minimally processed alloys.

Yet alternative suppliers remain fragile. Molycorp’s processing capacity is still 18 months away if all goes well, while Australia’s Lynas operation faces environmental and financial pressures. Many projects launched after the 2010 price spike collapsed during the 2012-14 commodity downturn.

At the hawkish end, analysts warn an embargo could disrupt everything from smartphones to the US military-industrial base. A 2018 report to Congress explicitly identified rare earths as a national security vulnerability. The most damning conclusion is uncertainty itself. Nobody knows for sure how disruptive an embargo would be – this ignorance reflects policy failure.

Hope for the best, plan for the worst

The global rare earth industry was worth just US$9 billion in 2018, trivial relative to US$75 trillion in global gross domestic product (GDP). US demand accounts for 10% of global consumption. Stockpiling rare earths would cost little compared with a US$20 trillion US economy or a US$650 billion defense budget.

Even dramatic price increases would barely affect end-product prices, since rare earths are embedded in industries worth US$1.5-2 trillion, most of which are located outside the United States. Yet fear itself can be destabilizing. Markets react to perceived vulnerability, and the inability – or unwillingness – of the US government to demonstrate independence from Chinese supply signals strategic weakness.

Conclusion

From China’s perspective, an embargo today would likely accelerate supply chain re-orientation away from China, reinforcing perceptions that dependence on Beijing carries unacceptable risk in an era of great power rivalry. From a systemic view, the rare earths debate exposes the limits of naive free-trade assumptions when state-driven and market-driven systems collide.

Allowing the weaponization of rare earth supply chains is a failure of Western policy, not an unavoidable outcome of globalization. Learning the right lessons from rare earth dependence could help rebuild resilience and support a fairer, more sustainable global trading system – one that recognizes power, strategy, and security alongside efficiency.

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